For the Month of October the Caravel Fund was up 0.67%. There is an expression that is apropos given the markets we find ourselves in.... “It’s better to look the fool than to open your mouth and remove all doubt”
We aren’t fortunetellers, but over the past couple decades we have learned a thing or two about the markets. We know when it looks easy ... it’s about to get tough. From July through September, we generated a return of 8% net, which works out to be 36.5% annualized. Don’t get us wrong, we’d love to produce those returns over 12 months, but we aren’t willing to bet your money and our entire fortune in order to do so. As we entered September everything looked perfect.... too perfect. We figured that was about as good as it was going to get. We reduced our gross exposure materially as we indicated in our letters leading up to October. In addition, we lowered our risk by adding to our convertible positions and increasing our hedges. We unwound some pairs, sold some of our beta trades, and focused on merger arb deals that were share for share (which are much lower risk). We wanted to protect the partners’ capital. We don’t try to time bottoms (not very good at it) so in October we covered some hedges in hindsight too early, and slightly increased our net exposure.
The amount investors are willing to pay for a dollar of earnings has dropped by 20% since August. Although the earnings are still rising in North America, the pros have grown very concerned over the 30% drop in the Chinese stock market, the political shift in the USA, the dislocation of Canada’s federal government from the reality of what pays its bills, and let’s not forget Brexit. The condition that will end the longest running bull market in history, will be the obdurate increase in cost the world pays for money. This has risen past 3% and will continue to rise like the lava in Hawaii...unstoppable and eventually destroying everything that lies in its path. Considering all these things the partners at Caravel Capital decided to step to the side, keep our mouths shut, and wait until things look a bit more distressed and fundamentally compelling. At of the time of writing, the jury is still deliberating.
To our new partners we say welcome, and to all partners we say thank you for your confidence and capital.
Jeff and Glen
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